Stablecoins

A fiat-backed stablecoin is a claim on an issuer. You give the issuer a dollar, it gives you a token; you return the token, it gives back the dollar. The token trades freely in between, and its price on an exchange reflects the market's confidence in that redemption promise rather than the value of anything intrinsic.

That makes the correct mental model a money-market fund with a blockchain transfer layer, not a currency. The issuer earns interest on the reserve, the holder earns nothing, and the difference is the business. When short-term rates are high, issuing stablecoins is extremely profitable; when they are near zero, the model is much thinner.

There is a second family worth separating out. Algorithmic or crypto-collateralised designs hold no equivalent dollar reserve, maintaining the peg through incentives or over-collateralisation in volatile assets. The 2022 collapse of one such design destroyed tens of billions of dollars in days, and the distinction between the two families is the single most important thing to establish before pricing any stablecoin question.

The dominant use is as the quote asset of crypto trading. Most order books are denominated in a dollar stablecoin rather than in dollars, because a token settles in seconds and a bank wire does not. That alone accounts for the majority of stablecoin transfer volume.

The second use is dollar access outside the US banking system. In economies with capital controls or high inflation, a dollar-denominated token that moves on a phone is a savings product, and this demand is largely insensitive to crypto market cycles - a structural floor under supply that did not exist a decade ago.

Third is on-chain finance: collateral for lending, the settlement leg of decentralised exchange trades, and treasury management for crypto-native businesses. Fourth, and growing, is straightforward payments: remittances, supplier settlement and payroll where the alternative is slow, expensive or unavailable.

The market is concentrated. Two issuers account for the large majority of dollar stablecoin supply, with the remainder split across bank-issued tokens, exchange-issued tokens and decentralised designs. That concentration is itself a systemic fact: a problem at either of the two would not stay contained.

The reserves behind the largest tokens are, in the main, short-dated US Treasury bills, overnight repurchase agreements and bank deposits. This makes the largest issuers meaningful buyers of Treasury bills - a rare case of a crypto structure with a direct footprint in a government bond market.

Verification is by attestation, not by audit, and the distinction matters. An attestation reports balances at a point in time under agreed procedures; a full audit tests the controls that produce them. Regulatory frameworks in the US and the EU have tightened requirements considerably since 2024, but published reserve reporting remains less rigorous than a regulated fund's.